South Dakota Form 1346 — Prime Contractor Exemption Certificate Explained

What Form 1346 Does

Form 1346 is the Prime Contractor's Exemption Certificate issued by the South Dakota Department of Revenue. It's the mechanism that determines who pays the 2% Contractor's Excise Tax on a given project — and on non-utility work, it shifts that entire liability to the prime contractor.

Here's the underlying logic: under SDCL Chapter 10-46A, the prime contractor is liable for the 2% excise tax on the total gross receipts of a construction project. Without Form 1346, every subcontractor on the project would also be independently liable for 2% on their own gross receipts. That would result in double taxation — the prime paying 2% on the full contract (including sub work) and each sub paying 2% on their portion.

Form 1346 solves this. When the prime contractor issues a properly completed exemption certificate to a subcontractor, the sub is relieved of the 2% excise tax liability on their subcontracted gross receipts for that specific project. The prime absorbs the full tax burden, which is the intended design of the non-utility excise tax structure.

When You Must Issue Form 1346

Every prime contractor on a non-utility construction project in South Dakota should issue Form 1346 to each subcontractor working on the project.

The certificate must include:

• Your CET license number (formatted XXXX-XXXX-ET)
• The specific project description — what's being built or improved
• The project location — physical address or property description
• The subcontractor's information — name and CET license number

Both parties keep copies. The DOR recommends retaining these for at least three years — matching the standard audit lookback period.

Project-Specific Requirement — Blanket Certificates Are Invalid

This is the single most important rule about Form 1346, and the one that gets contractors into audit trouble: each certificate must be issued for a specific project. Blanket exemption certificates that cover multiple projects, ongoing relationships, or undefined future work are legally invalid.

If you regularly use the same subcontractors across multiple projects, you need a separate Form 1346 for each project. This feels redundant for long-standing working relationships, but the Department of Revenue is explicit — a blanket certificate will be rejected during an audit, and the subcontractor will be assessed the 2% excise tax on every project where a valid project-specific certificate doesn't exist.

The Utility Project Exception

Form 1346 does not apply to qualified utility projects under SDCL Chapter 10-46B. The utility excise tax structure operates fundamentally differently:

On utility projects (contracted directly with qualified utility companies such as railroad, telephone, rural water, or electric power entities), both the prime contractor and all subcontractors are independently liable for the 2% excise tax on their respective gross receipts.

On these projects:

• Prime contractors cannot issue exemption certificates
• Subcontractors cannot accept them
• Each party remits 2% on their own gross receipts

The practical difference is significant. On a non-utility project, the prime absorbs the full tax load and passes it to the property owner through the bid factor. On a utility project, every tier of the contracting chain faces independent tax liability, and each party must build the excise tax into their own pricing.

Tax Audit Protection

The DOR audits contractors for proper excise tax compliance, and Form 1346 documentation is a primary audit target. During an audit, the examiner will review:

1. Whether valid, project-specific certificates exist for every subcontractor on every project
2. Whether the prime reported the full gross receipts including all sub work covered by the certificates
3. Whether subcontractors who received certificates properly excluded those amounts from their own excise tax filings

Missing or defective certificates can create tax-compliance problems for both parties, so retain complete project records for the audit period.

Materials Still Get Sales/Use Tax

One common misconception: Form 1346 only addresses the 2% excise tax. It does not exempt anyone from the standard state sales or use tax on construction materials.

Subcontractors who receive a Form 1346 are still liable for the standard 4.5% state sales tax (plus any applicable municipal sales tax) on materials they furnish for the project. The exemption certificate only relieves them of the 2% excise tax on their gross receipts.

If a subcontractor purchases materials from an out-of-state vendor who doesn't collect South Dakota sales tax, the sub must report and remit the 4.5% use tax on those materials — regardless of whether they hold a Form 1346 for the project.

The South Dakota Contractor License Guide includes the complete excise tax framework, including the 2.041% bid factor calculation, use tax tracking for out-of-state purchases, and the speculative builder rule — all the tax mechanics that interact with Form 1346 on your projects.

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